November 2, 2015

Here's how to maximize Social Security benefits

If you're one of the 59 million Americans collecting Social Security, the government's announcement earlier this month that you won't be getting a cost-of-living raise next year must have been a disappointment.

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If you keep working past retirement age you can put off drawing on retirement benefits and potentially boost your ultimate payout.

You can't do anything about those cost-of-living adjustments, or COLAs — those depend on inflation rates. But there are some variables you can control to make the most out of your Social Security benefits.

At what age you begin tapping your account or whether you continue to work while receiving benefits are among the factors that can make a big difference to the size of your nest egg.

“It's really critical to get this right,” said Wes Brown, a certified financial planner at Rather & Kittrell in Knoxville, Tennessee. “Simply taking benefits at the earliest possible time without any strategizing can cost almost everyone a lot of money.”

Here are some steps that can help:

Estimate your income

Before deciding when to begin drawing Social Security benefits, it's essential to estimate how much income you'll have once you retire, including whether you plan to keep working and any pensions you've earned.

If you have a 401(k) or similar retirement account, your plan administrator's website should provide projections of how your balance translates into regular income payouts over time.

If you haven't already, set up an account on the Social Security Administration's website, ssa.gov, and review your record for accuracy. That's key, because your monthly benefit will be based upon a formula that takes into account the average of your highest 35 years of inflation-adjusted earnings.

Also check out this online benefit estimator: Socialsecurity.gov/retire2/estimator.htm.

Delay if you can

While you can start taking Social Security benefits at age 62, the longer you can wait, the higher your monthly benefit can grow until it locks in at age 70.

Here's how it works: Let's say you've earned a monthly retirement benefit of $1,000 a month.

To get that amount, though, you have to wait until you reach “full retirement age,” between 66 and 67 depending on when you were born.

If you start tapping benefits at age 62, your payment will be reduced by about 25 percent to $750.

But if you wait, you will earn a credit that boosts your monthly benefit by about 8 percent a year. At 70, your monthly benefit would have surged to $1,320, plus any annual COLAs, for life.

All this, of course, depends on your overall financial picture. About half of Americans choose to collect at age 62 because they have no other savings.

Collecting benefits earlier may also make sense for retirees who have health concerns or a family history of a shorter life expectancy. Consider that if you put off receiving benefits until age 70, it will take you until age 81 to reach breakeven, or the point when you would have received more in Social Security payments by waiting than by collecting early. If you wait until 66, you will break even at 78.

In general, locking in a higher monthly benefit is a good strategy. More than one in three 65-year-olds today will live to age 90, according to the Social Security Administration.

“The biggest financial risk for retirees is outliving their money, not dying before they get to spend it all,” said Randy Bruns, a certified financial planner with HighPoint Planning Partners in Downers Grove, Illinois. “Locking in a reduced monthly benefit for the rest of your life simply because you might die young leaves you at a tremendous disadvantage if you instead live into your late 80s and beyond.”

Keep working

Continuing to work past retirement age can help you put off drawing on your retirement benefits and, therefore, potentially boost your ultimate payout.

However, if you keep working and begin tapping Social Security benefits before you reach full retirement age, your benefits may be reduced.

That's because there's a limit on how much you can earn while receiving benefits: $15,720 this year. For every $2 over that number you earn, the government deducts $1.

Once you reach full retirement age, this rule no longer applies and you can earn as much as you like. The Social Security Administration will factor in any deductions and give you a credit.

Spousal benefits

You may be eligible to receive Social Security benefits based on your spouse's work history in addition to your own.

The government will pay you your benefits first, but if the benefits that you're entitled to through your spouse are higher, you'll receive a combination that equals your spouse's benefit.

As with your own benefits, the earlier you collect the less you will receive. The maximum you can get: up to half what they would be eligible for at full retirement.

Divorcees are eligible for similar benefits if they were married at least 10 years. Keep in mind that if you later remarry, you generally cannot collect benefits on your former spouse's record unless your later marriage ends.

One strategy for couples to maximize the benefits they receive is for the spouse who has earned a bigger Social Security payout to file for benefits and then suspend them, allowing the other spouse to claim only spousal benefits while the higher earner waits until age 70. In this scenario, the spouse collecting only a spousal benefit can leave their own Social Security untouched, racking up credits for a bigger monthly payout years later.

There's no need to wait until age 70 to collect a spousal benefit, said Joseph Lucey, president of Secured Retirement Financial in St. Louis Park, Minnesota. “That's another common mistake we see.”

Get advice

Retirement planning and navigating through the Social Security system can be a complex business. When you're nearing retirement, sit down with an accountant or personal finance specialist who can help map out how to best proceed.